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In Monastiraki Square, actors in a mock Euro match between Germany and Greece. Reporter#36588/Demotix. All rights reserved.Events in Greece
sparked off the eurozone crisis in 2009 and continued to have a dominant
influence on the course of the crisis ever since. Greece in 2009 had a huge
debt problem which it managed to conceal from its partners in the EMU. Of
course, you may ask how events in a small peripheral European country of 11
million people, accounting for only about 2% of Eurozone GDP, may cause a
crisis in the Eurozone - the second largest economy in the world - threatening
the stability of the entire global economy? Surely, first and foremost, a
massive Greek sovereign debt is a massive problem for the Greek sovereign. Rule
violations and lies must have consequences on those who violate the rules and
lie about it. This conclusion, however, is not as straightforward as it sounds.

Greece was a member of
the European Monetary Union (EMU) which had, and still has, two cardinal rules:
rule one, governments of member states must not over-borrow; rule
two, if they do over-borrow, they must not expect or seek help from the
European Central Bank (ECB). The Central Bank of the eurozone was not allowed
to lend directly to governments. The problem for the euro-group governments was
how to apply rule two when members, for whatever reason, violated rule
one. Clearly the rule was put in place in order to deal with the ‘moral
hazard’ problem. It was supposed to inhibit and restrain governments from
ignoring rule one.

Greece’s serious fiscal
misdemeanors revealed in 2009, inadvertently and critically, exposed a fatal
flaw in rule two: the strict application of the ‘no bail-out’ clause was
effectively condemning member countries to default and exit from the single
currency. Such harsh punishment could arguably be contemplated for serious
offenders but only if the rest of the monetary union could be insulated from
the effects of one member exiting the monetary union. Since the need for such
measures to prevent ‘contagion’ was not expected or foreseen, no such measures
were put in place when the euro was created. Greece, instead of being thrown
out of the eurozone for its rule violations and fibs, was seemingly ‘rewarded’
with a massive 245 billion euro EU-IMF ‘bail-out’ and substantial debt
restructuring.

Whatever the real
motives behind this decision - whether it represented a genuine desire to show
European solidarity to Greece or simply self-interest - the result was
unambiguous: Greece was given the opportunity for redemption.

The country had to
rebalance its economy through an economic adjustment program, designed and
supervised by the so called ‘troika’, of fiscal consolidation and structural
reforms. Similar assistance and adjustment programs (without debt
restructuring) were extended to Ireland (2010) and Portugal (2011). During this
period Ireland (faithfully and stoically) and Portugal (more or less faithfully
but less stoically) implemented, completed and exited the programs imposed by
their creditors.

The Greek political
system was fractious throughout this whole period. The implementation of the
‘troika’ adjustment program was haphazard and half-hearted and anything but
‘stoical’. Nevertheless, in 2014, despite the political turmoil, Greece was
preparing for exit from the ‘troika’-imposed program. Both fiscal and
current account deficits had not only been eliminated but turned into
substantial surpluses - an economic adjustment success story that is unparalleled
in global financial history. For the first time after six years of deep
recession (more accurately of a 1930s style depression) Greece was expected to
return to positive economic growth in 2014. Yet in December 2014 interest and
concern about Greece dramatically shifted away from the possibility of Greek
exit from the ‘troika’ program to a possible Greek exit from the eurozone or
Grexit.

The future of Greece
and possibly the future of the eurozone were up in the air again because of the
announcement of ‘premature’ elections in Greece and the pledge by the Greek
opposition party, Syriza, to renegotiate the ‘troika’ program if it wins the
elections. Syriza will put an end to austerity and demand debt forgiveness for
Greece along similar lines to that granted to Germany by the London debt
conference in 1953. The threat of repudiation of existing agreements has
created exasperation among the political class in Germany who holds the eurozone’s
purse strings, and other northern European countries. There is also,
reportedly, considerable ‘bail-out fatigue’ among their electorate. From the
standpoint of northern Europe, therefore, Greece appears to be ‘irredeemable’.
Is it time for the ‘amputation’ option or Grexit? What was deemed not to be an
option in 2010 and 2012 appears to be feasible in 2015. In terms of morality,
is it not unreasonable and unfair to expect Greece’s prudent hard-working and
responsible partners to ‘forgive’ the debt or ‘forget’ the strict conditions
attached to the ‘bail-out’ that saved Greece from bankruptcy?

This familiar story of Greece’s
relationship to the eurozone and the related morality tale has become the
dominant narrative of the eurozone crisis which divides Europe between the
indebted and ‘imprudent’ southern periphery and the ‘prudent’ and solvent
northern Europe. This narrative despite its resonance and credibility is flawed
both in terms of its diagnosis about the origins of the crisis and its ethical
conclusions. The eurozone crisis is a crisis of public indebtedness but not,
as is commonly portrayed, a fiscal crisis. The euro-zone crisis was a
crisis ‘waiting to happen’ with or without Greece’s rule violations and lies.
What should the alternative narrative be?

A counterfactual question

Since the ‘Greek story’
is so central to the dominant narrative, the best way to approach the
alternative narrative is to start by supposing that Greece was not a member of
the Eurozone in 2009. What would have been the course of the eurozone crisis
without the Greek story? Counterfactual questions are, of course, notoriously
difficult to answer with any certainty but it is fairly safe to assume that
events in Ireland in 2010 would have sparked off the eurozone debt crisis.
Unlike in Greece, however, where the Greek sovereign misbehaved, the Irish debt
crisis was not the result of fiscal indiscipline. It was the result of what has
been described as a ‘plain vanilla’ banking crisis. Non-compliance with the
rules of fiscal discipline would not have done as an explanation for the crisis
in Ireland. The Irish government’s management of its public finances prior
to the crisis was in fact exemplary. Moreover many of the ‘structural reform’
issues that had plagued the Greek economy - tax evasion, overblown public
sector, inflexible labour markets etc. - were absent in Ireland. The necessary
‘structural reforms’ had been implemented in Ireland twenty years early,
transforming one of the poorest economies in the EU into the ‘Celtic Tiger’
economy - the ‘poster child’ of the neoliberal economic growth model for
peripheral economies.

If the deadly sin of
‘fiscal indiscipline and irresponsibility’ was not the cause of the collapse of
the Irish economy or indeed of the critical financial problems in Portugal and
Spain - the next two eurozone countries to be embroiled in the eurozone debt
crisis - what caused the crisis in Ireland that subsequently spread to Portugal
and Spain?

Without a ‘Greek story’
the catastrophic public indebtedness in the euro-zone had to be explained not
in terms of the misbehaviour of the public sector but in terms of the gross misconduct
of the private sector, in particular from the ‘unholy alliance’ of property
developers and bankers, especially in Ireland and Spain. Why was the
private sector in Ireland and Spain able to bankrupt the public sector of these
economies? The answer is to be found in the so called ‘design faults’ of the
monetary union that was launched in Europe in 1999.

European leaders
decided to create and share a single currency but without the necessary
political foundations. They hoped and expected that a well functioning monetary
union would ‘eventually’ lead to greater political union in Europe.

They anticipated that,
initially, in a monetary union without a fiscal union the public sector could
become a source of instability. Therefore a strict set of rules for fiscal
discipline was put in place. The architects of monetary union in Europe
believed that the private sector was fundamentally stable and therefore no
comparable measures were put in place to monitor potentially destabilizing
activities in the private sector.

With hindsight they
were wrong. For the period 1999-2008 the monetary union was malfunctioning
but European policymakers and financial markets remained largely oblivious to
and singularly unconcerned about the growing imbalances in the eurozone.

Eurozone imbalances

A monetary union masks
several imbalances in both the real and the financial sectors of the economy.
For example, outside a monetary union current account imbalances and
corresponding capital flow imbalances will be reflected in exchange rate
movements. In a monetary union such imbalances can persist and remain
uncorrected.

They can also cause
distortions and may increase financial vulnerability. In the eurozone the
elimination of currency risk, inter alia, fostered lower interest rates
and easier credit conditions mainly in the eurozone’s southern periphery and
Ireland. Artificially high availability of credit and artificially low
cost of credit resulted in excessively high levels of borrowing by both private
and public sectors.

In Greece imprudent
politicians and in Ireland irresponsible bankers reacting to the same
incentives created by a malfunctioning monetary union went on a borrowing
binge. This was undoubtedly irresponsible but when the market provides the
wrong signals governments need to act and correct the inappropriate market
signals. This was not happening in the EMU.

In Greece excessive
borrowing may have financed the creation of non-jobs and expensive early
retirement schemes in an overblown public sector; in Ireland and Spain it
financed the building of empty flats in Dublin and in the Costa del Sol. These
were different distortions in the economy but distortions nonetheless,
resulting from the same ‘design faults’ of EMU – the lack of a surveillance
mechanism for preventing crises and more crucially a mechanism for managing a
crisis, once it occurs.

There is no harm in
castigating Greece for its fiscal indiscipline and manipulations of the
official statistics. There is however a great deal of harm in ‘stigmatizing’
Greece, because it distorts the narrative of the crisis. Fiscal discipline
would probably have prevented a debt crisis in Greece but it would not have
prevented the eurozone crisis. The ‘Greek story’ simply diverts attention from
the real task ahead which is the correction of the serious ‘design faults’ of
the monetary union in Europe.

The dominant narrative – and one more thing

According to the dominant
narrative Greece is the eurozone’s weakest link with the longest and deepest
recession and highest debt to GDP ratio of all eurozone countries. Five years
of austerity produced neither growth nor reduction in indebtedness. Greece is
also the ‘black sheep’ of the monetary union. Syriza, the main opposition party
is adding insult to injury by demanding debt forgiveness and end to austerity.
Who is going to pay for all this? At this point the dominant narrative raises
the moral question again of whether it is fair that the (mainly) German
tax-payers’ hard-earned money be used to help the profligate Greeks?

There is, however,
another aspect to this particular ethical dimension of the eurozone crisis
which rarely gets a hearing in the dominant narrative. Greece may have broken
the written
rules of a monetary union but Germany has been violating the unwritten rules
of a monetary union. Legally the two cases are different but morally they are
equivalent. Moreover it can be argued that in terms of actual economic impact
Greece’s violation of the written rules is far less significant than Germany’s
violation of the unwritten rules.

It is, of course,
shocking for the ‘virtuous’ German government and tax-payers to be accused of
unethical and harmful behaviour but, as Mandeville in The Fable of the
Bees and Keynes in The General Theory had argued, private virtues
can sometimes become public vices. Suppressing wages in order to gain
competitiveness and achieve export-led growth makes sense outside a monetary
union but not within a monetary union. This is not only bad economics but also
poor ethics. Amassing huge current account surpluses and refusing to eliminate
them is not playing by the rules of the game in a monetary union. Germany has
been benefiting from the malfunctioning of the monetary union but is refusing
to participate in the adjustment process by reflating its economy.

It is also obstructing
the ECB from taking measures to arrest deflation which is making the debt
dynamics in the indebted periphery more challenging.

Is it
Germany and not Greece that is the problem in Europe? My answer to this
question is a categorical no. Both Greece and Germany need to join forces for a
joint European effort to reform the single currency. Greece has to fight
corruption and must modernize its economy and indeed this is not negotiable.
Exit from the failed strategy of austerity, however, is and should be
negotiable. Debates on Grexit are a big digression and a waste of time. The survival
of the eurozone is vital if the original dream of a united Europe is to be
fulfilled. Its rules, however, need to be re-written. What needs to be
re-negotiated urgently is a reformed eurozone without its basic ‘design faults’
and with a clear vision of what unity in Europe means

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